• How does nominal GDP differ from real GDP?
• Nominal = measures current prices• Real = measured in constant/unchanging
prices
Business Cycles
Tracking a Business Cycle
Contractions
• Recession – prolonged economic contraction, usually 6-18 months. Unemployment in the 6-10% range
• Depression – no precise definition. Long and severe recession with high unemployment and low factory output
Economic Variables
1. Business Investment2. Interest Rates and Credit3. Consumer Expectations4. External Shocks
Business Investment
• When economy is expanding firms expect sales and profits to rise
• So they invest and this spending creates output and jobs
• Until they cutback
Interest Rates and Credit
• When interest is low people are willing to invest/borrow/use credit
• When interest is high people do not spend as much– 1980s some credit card interest rates reached 21%– Loans as high as 17%
Consumer Expectations
• Self-fulfilling Prophecy– Believe that economy is growing makes people
willing to spend• Can cause an expansion
– Believe economy is slow people not willing to spend• Can cause a contraction
External Shocks
• Difficult to predict• Positive– Discovery of oil or minerals– Bountiful harvests
• Negative– War, droughts, hurricanes
Leading Indicators
• Economists use to predict
• Stock Market• The Conference Board
• Private business research organization• Ten leading Economic Indicators
– Stock prices, interest rates, etc
History
• Great Depression– Economists need to monitor– GDP fell by 1/3, Unemployment 25%– FDR: Gov’t programs to get people back to work• WPA (Works Progress Admin) and CCC (Civilian
Conservation Corps)
History
• 1970s– OPEC oil embargo– High oil prices forced Americans to find alternatives
• 1980s– High Interest rates
• 1990s– Pretty good
• 2000s– Another recession
• What are 3 indicators of how the Economy is performing?
• Stock Market, GDP, The Conference Board
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